T H I N G S YO U CAN DO NOW
WITHOUT THE OLYMPICS, CHASE YOUR OWN SILVER (LININGS)
BRIAN VNAK
Vice President, Advisory Services
The silver lining of a cloud is not actually silver but sunlight diffracted by cloud droplets on the periphery. The darker and denser the cloud, the more prominent the silver lining appears to be. Hence the metaphor. So, when we talk about silver linings in a down economy, we do so with the knowledge that there is, in fact, light behind the cloud. When we invest, we do so knowing that the fundamentals of our economy are sound. With this knowledge, we can use both the clouds and the linings to our advantage.
SILVER LINING #1: Roth Conversions The coronavirus caused a major market downturn and probably took your retirement account balances with it. For those who have an IRA, you have likely seen years of gains offset by this recent period of loss. That’s the cloud. But we know there’s light. Historically, markets have bounced back from even the worst economic plights. So, let’s take advantage of the cloud and perhaps consider a Roth IRA conversion. When converting a Traditional IRA to a Roth IRA, you pay income taxes on pretax funds in your conversion year. This can move you into a higher income tax bracket, reduce deductions and credits, and impact Social Security benefits as well as Medicare premiums. That’s a cloud in and of itself. Of course, there tend to be very good reasons to do a Roth IRA. The silver lining is the benefit of being able to take tax-free distributions, even on earnings from your investments. This was already a pretty good time to do a Roth conversion, as tax reform eliminated AMT considerations for most people and lowered tax rates on the conversions themselves. Those tax rates are set to expire in 2025, so the window is closing. While it certainly doesn’t feel great to see your IRA account balance go south, doing a Roth conversion when markets are down provides additional savings. Your tax bill is based on the value of the IRA account at the time of conversion. This is one of those rare instances where it makes perfect sense to “time the markets.” When the market rebounds (the light behind the cloud), those earnings will be tax-free. If you have seen a change in income as a result of the coronavirus, the cloud is darker, but the opportunity is brighter. Taking your Roth conversion when your income is lower means you could potentially pay taxes in a lower bracket, and potentially have more losses to offset your gains. There are, of course, several considerations before opting to do a Roth conversion. If, as might be the case in these troubled times, you need your IRA money for living expenses, now might not be the best timing. If you anticipate being at the phase-out threshold for emergency relief as part of the CARES Act, that might also give you pause.
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